Forcing workers to divert more of their salary to the provident fund is wrong

The EPFO’s new norms would only serve to curtail an employee’s consumption and freedom to choose how to save for the future.

The Employees' Provident Fund Organisation's (EPFO) decision to include all allowances in the salary amount whose 24% (12% each by the employee and by the employer) has to be mandatorily saved with the PF is downright retrograde. It thinks it is helping employees, preventing employers from lowering their contribution to the employee's retirement savings.

This is pure delusion. All that would happen is that the employee's take-home salary would come down drastically, she would get to spend less, and get to save less in a manner of her choosing and end up with both lower present consumption and lower deferred consumption, given the miserable track record of the EPFO in managing workers' savings. The move would also depress overall growth: consumer spending would be constrained as Indian workers practise forced austerity.

The circular was apparently prompted by two independent rulings, by the Madras High Court and the Madhya Pradesh High Court, holding the various allowances paid by the employer to the employee to be part of basic wages. Historically, most companies have computed PF contributions as a share of basic salary and dearness allowance.

The EPFO claims that employers split wages into different allowances to reduce their PF contributions. However, contribution to the PF is a part of an employee's cost to the company (CTC). An employer can restructure the entire salary, including PF contributions, to keep CTC unchanged.

The EPFO's new norms would only serve to curtail an employee's consumption and freedom to choose how to save for the future. The agency would grab hold of all savings and invest them in its retarded manner and generate tiny returns. It turns to perverse means, such as dipping into inoperative accounts, to enhance its payout.

The larger point is that the management of the EPF is terrible, unlike in the case of the National Pension System (NPS), in which employees have some choice in the allocation of their savings to different instruments with different risk-reward profiles. The only reform that the EPFO warrants is voluntary migration of workers to the NPS, along with their employers' contribution.